More Disruptive Technology Start-Ups, Please

April 22, 2010

For 30 years, the process of job creation in the U.S. was the envy of the world. Start-up entrepreneurs backed by private investors, followed by public investors, created and expanded companies that generated millions of jobs, all while growing the U.S tax base. These new companies became the backbone of our modern economy.

While Ford, International Harvester, Chrysler, PanAm and RCA shrank or declared bankruptcy, Adobe, Dell, Microsoft, Cisco, Intuit, Yahoo, and hundreds of others were created jobs, increased our standard of living, and made America a better place.

Today that process is under siege: .not only from abroad where nations are duplicating our process, but also domestically, as well-meaning legislators are undermining the process. We can handle the international competition, but these internal assaults could be the death of America’s standard of living.

Step 3 – The company moves into the public market, where it has even greater credibility and access to capital, enabling it to continue to create jobs.

This whole process costs the government nothing, while it simultaneously increases the U.S. tax base. But it’s about to come to an end if elements of Senator Dodd’s new Banking Bill are passed into law. Specifically, the Dodd Bill makes it much harder for individuals to qualify as angel investors. It’s already competitive enough for startups to attract early investment.

If these changes are implemented, the definition of “accredited investor” will be individuals with a net worth of over 2.3 million. Currently that minimum is 1 million. As a serial entrepreneur and early stage investor, I know firsthand what this means to the future of startups. If these changes are implemented there will be significant reduction in the number of startups that are able to attract funding.

Other countries have no such artificial barriers. In China, where for the first time, in 2009, more money was raised in IPOs than in the U.S, anyone can have a chance of getting rich and investing in risky startups. I guess our government thinks you can’t handle the risk associated with early stage companies, unless you are already rich. Why is it only the rich should have access to this exceptional asset class? True 60% of startups will produce no economic return for investors, but in aggregate the asset class is outstanding.

Section 412 of the draft bill recommends adjusting the accredited investor to for an individual to $2.3 million in net worth or $450,000 plus in annual income. At a time when many accredited investors have lost approximately 20% of their net worth and innovative startups are having an increasingly difficult time raising equity capital, decreasing the potential pool of angel investors is counterproductive to supporting the very companies that will create new high paying jobs.

Section 926 of the bill would require, for the first time, companies seeking angel investment to make a filing with the Securities and Exchange Commission, which would have 120 days to review it. This would both raise the cost of seeking angels and delay the ability of companies to benefit from their funding. 120 days is an eternity for a fast growing start-up. Kauffman Foundation Vice President, Robert Litan notes: “that 'protections' for angel investors in Section 926 of the comprehensive financial reform bill outlined by Senate Banking Committee Chairman Senator Dodd are unnecessary and will hurt America's job creators.”

Section 928 of the legislation would repeal the existing federal preemption of state regulation over “accredited investor” securities offerings. This would end the uniform, national set of rules for financing startups. By eliminating regulation that is working well, the draft bill would expose technology startups to a potentially complicated system of patchwork, state by state regulation, resulting in higher costs, more legal risks, and the potential of not being able to raise capital because of different rules in different states. Nothing would be gained from this change: no additional protections would be provided to the accredited angel investors and there would be no benefits to the national financial system or to the economy.

These three Sections of the bill will kill the creation of jobs, especially green jobs.

Right now the CleanTech industry in the U.S is in its infancy. Many of the companies of the future are currently angel backed and all rely on investment for their early stages of growth.

These companies produce no drain on the U.S. treasury, and in fact increase the tax base by growing the economy.

A good example is Locus Energy, With Angle backing; Locus is developing the hardware and software to manage alternate energy sources like solar panels.

Another good example is high quality carbon offset provider, Belgrave Trust. With Angel backing, Belgrave Trust helps high-net-worth individuals (and some corporations) use market based solutions to completely offset their carbon footprint.

Both companies are growing their revenue, delighting their customers, and both companies are creating an ongoing stream of high quality green jobs.

Our future is dependent on entrepreneurs and angel investors, for they will create the jobs of the future. I just hope well intentioned legislators destroy the process.

November 07, 2008

I have a group of friends that are passionate about solving global warming. We e-mail around articles, observations and opinions. These friends are mostly tech-entrepreneurs, economists and wall-street-types, so the conversation is usually very action-oriented… as opposed to political or academic policy/theory. But this week something changed. Now that the election is over, even my political-policy-wonk friends started talking about climate change. My theory is that now that the election is over, global climate change will start to get the attention it deserves. Looks like the new administration agrees, because they seem poised to appoint a “Climate Czar” Global climate change is as big as a problem as problems get. To solve it, we are going to need innovation from everywhere. Historically, I have trumpeted the innovation form industry, scientist and entrepreneurs. (Full disclosure am a huge fans of Joseph Schumpeter’s theory of creative destruction). However, climate change demands innovation in public policy (translation: governments). Let’s hope that now that the election is over, we can move the conversation about climate change off the listserve and onto the web. I predict Global Climate change will get solved: By technology, Invented by scientists, Commercialized by entrepreneurs, Spurred on by investors, and supported by public policy.Let’s hope a more public discussion adds fuel the fire, (Wow, that is a bad use of metaphor).